Whether your pockets are oozing with money or not, if you are an investor or homeowner you probably have been feasting on cash during the last few years.
The world has been flush with it.
Massive flows of cash have been fueling a world economic boom, pushing stock markets globally to new heights, boosting the prices of everything from real estate to commodities, prompting record mergers and acquisitions and sending private equity firms on a buyout rampage.
But some refer to current conditions as "excessive liquidity" -- or an unusual abundance of easy cash. And investors are watching for signs that the spigot might be turned down -- perhaps cooling off stocks and other assets in the process.
Liquidity is like fuel or lubrication for the economy, says Wells Capital Management strategist James Paulsen. "Without proper lubrication, the economic engine grinds to a halt."
So when central banks, such as the Bank of England, raise rates as the institution did last week, and others in Europe and Asia consider similar moves to fight inflation, investors get jittery.
They are aware that the last few years have been a remarkable period that did not happen by accident.
In the early 2000s, after the technology stock bubble burst and terrorist attacks caused fear of a possible depression, the Federal Reserve took actions to juice the economy with cheap money. The Fed lowered short-term rates below 2 percent, far below historic norms. And with emerging market currencies pegged to the dollar, countries throughout the world followed.
"The world is awash with U.S. dollars," said Paulsen. "Ultimately this prolonged period of excess liquidity will result in higher inflation [destroying the real purchasing power of cash] and a lower value of the U.S. dollar [damaging the international purchasing power of cash]"
So Paulsen is urging investors to watch aggressively for increasing signs of inflation and be ready to bolt from the types of investments that have benefited in the lush money environment -- cyclical companies, like technology, which depend on a strong business spending and small-company stocks, and emerging market stocks.
"The stuff you want to be in now, won't be what you want to be in when this turns," he said. "It's a dangerous game."
He suggests that anyone playing it keep an eye on economic reports that suggest inflation. For example, while a stronger-than-expected payroll report could be good news to workers wanting jobs and good pay, eventually rising wages could force employers to raise their prices and spark inflation. The remedy would be to crank down the money spigot.
Still, Paulsen isn't urging investors to bolt now. "Prices of stocks, bonds and real estate will do well because there are too many dollars chasing returns."
Likewise, Standard & Poor's analyst Alec Young warned investors in a recent report not to jump too quickly away from stocks. Some analysts have been particularly concerned recentlt about an investing strategy that has been popular in generating billions of dollars in easy money for investing. It's called the "carry trade." With interest rates very low in countries such as Japan, investors have been able to borrow in Japan cheaply and make money by investing the money in countries with substantially higher interest rates.
But if Japan raises rates, as some investors fear will happen, the easy source of cash would dry up.
"Bears believe the potential removal of liquidity could result in a sharp rise in volatility, as investors shun stocks in favor of lower-risk asset classes like cash," said Young.
Still, he is not among the bears. He thinks Japan will raise rates only gradually -- eroding the popularity of the yen carry trade, but not causing negative repercussions for global capital markets.
The Bank Credit Analyst, a Montreal-based research publication, noted this month that if there are repercussions, the most severely impacted could be "illiquid assets that have appreciated by more than can be explained by fundamentals." In a report entitled "Riding the Liquidity Wave," the analysts say the most vulnerable would probably include base metals, some emerging equity markets such as India, and "perhaps some of the exotic credit market instruments that have been created in the U.S. and Europe."
The report notes: "There is a lot of leverage in the system, so that raises the prospect of a financial accident, perhaps along the lines of the October 1998 failure of Long-Term Capital Management," a reference to the collapse of a highly leveraged hedge fund.
Yet, the Bank Credit Analyst does not discourage investors from investing in stocks: "There is still a lot of money out there that is hunting desperately for returns."
Young agrees. He suggests that investors study their investments and make sure they are not overemphasizing risky investments. For example, emerging-market stocks have climbed almost 300 percent in the last five years and may be overly prominent in portfolios.
Instead of withdrawing completely, he suggests cutting exposure back so a portfolio has 5 percent in emerging-market stocks and 15 percent in developed markets. He is urging investors to keep a "healthy weighting" in stocks -- about 60 percent of a balanced portfolio.
Contact Gail MarksJarvis at firstname.lastname@example.org or leave a message at 312-222-4264.Copyright © 2015, Los Angeles Times